Question

Case 8-33 (Algo) Master Budget with Supporting Schedules (L08-2, L08-4, LO8-8, LO8-9, L08-10) You have just been hired as a new management trainee by Earrings Unlimited, a distributor of earrings to various retail outlets located in shopping malls across the country. In the past, the company has done very little in the way of budgeting and at certain times of the year has experienced a shortage of cash. Since you are well trained in budgeting, you have decided to prepare a master budget for the upcoming second quarter. To this end, you have worked with accounting and other areas to gather the information assembled below. The company sells many styles of earrings, but all are sold for the same price $14 per pair. Actual sales of earrings for the last three months and budgeted sales for the next six months follow (in pairs of earrings): January (actual) February (actual) March (actual) April (budget) May (budget) 20,800 26,300 40,00 65,800 100, 500 June (budget) July (budget) August (budget) September (budget) 50,00 30.800 28,800 25,00 The concentration of sales before and during May is due to Mother's Day. Sufficient inventory should be on hand at the end of each month to supply 40% of the earrings sold in the following month Suppliers are paid $4.40 for a pair of earrings. One-half of a month's purchases is paid for in the month of purchase, the other half is paid for in the following month. All sales are on credit. Only 20% of a month's sales are collected in the month of sale. An additional 70% is collected in the following month, and the remaining 10% is collected in the second month following sale. Bad debts have been negligible Monthly operating expenses for the company are given below: Variablet sales commissions of Sales

Answer 1

Answer 1.

Budgeted Unit Sales Selling Price per unit Total Sales Sales Budget April 65800 14.00 921200 May 100800 14.00 1411200 June 50800 14.00 711200 Quarter 217400 14.00 3043600 February Sales March Sales April Sales May Sales June Sales Total Cash Collections Earrings Unlimited Schedule of Expected Cash Collections April May June Quarter 375 20 37520 399840 571 20 456960 184240 644840 92120 921200 282240 987840 1270080 142240 142240 6216001 98420012222002828000

Earrings Unlimited Merchandise Purchases Budget April May Budgeted Unit Sales 65800 100800 Add: desired Ending Inventory Inventory 40320 203 20 Total Needs 106120 121120 Less: Beginning Merchandise Inventory 263 20 40320 Required Purchases 79800 80800 Unit Cost 4.40 4.40 Required Dollar Purchases 351120 3 55520 June 50800 123 20 63120 203 20 42800 4.40 188320 Quarter 21 7400 12320 229720 26320 203400 4.40 894960 Accounts Payable April Purchases May Purchases June Purchases Total Cash Payments Earrings Unlimited Budgeted Cash Disbursements for Merchandise Purchases April May June 104000 175560 175560 177760 177760 94160 279560 353320 271920 Quarter 104000 351120 355520 94160 904800

Answer 2.

May 54192 984200 1038392 225624 1222200 1447824 Quarter 78000 2828000 2906000 Earrings Unlimited Cash Budget April Beginning Cash Balance 78000 Add: Collection from Customers 621600 Total Cash Available 699600 Less: Cash Disbursements Merchandise Purchases 279560 Advertising 240000 Rent 22000 Salaries 114000 Commissions 36848 Utilities 9000 Equipment Purchases 0 Dividend Paid 18000 Total Cash Disbursements 719408 Excess of Cash Available Over Disbursements -19808 Financing: Borrowings 74000 Repayments 0 Interest Total Financing 74000 Ending Cash Balance 54192 Interest = $ 74,000 * 1% *3 = $2,220 353320 240000 22000 114000 56448 9000 18000 0 812768 225624 271920 240000 22000 114000 28448 9000 44000 904800 720000 66000 342000 121744 27000 62000 18000 2261544 644456 729368 718456 0 1 o 0 0 0 225624 - 74000 -2220 -76220 642236 74000 -74000 -2220 -2220 642236

Answer 3.

3043600 1078304 1965 296 Earrings Unlimited Budgeted Income Statement For the Three Months ended June 30 Sales Less: Variable expenses Cost of goods sold 956560 Sales commission 121744 Contribution margin Less: Fixed expenses Advertising 720000 Rent 66000 Salaries 342000 Utilities 27000 Insurance 10200 Depreciation 54000 Net Operating income Interest Expense Net income 1219200 746096 2220 743876

Answer 4.

Earrings Unlimited Budgeted Balance Sheet June 30 Assets Cash 642236 710080 54208 12800 998000 2417324 Accounts Receivable (May sales $141,120; June sales $568,960) Inventory Prepaid insurance Property, plant and equipment (net) Total assets Liabilities and Stockholders' Equity Accounts payable Dividends payable Common Stock Retained earnings Total liabilities and stockholder's equity 94160 18000 880000 1425164 2417324